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    ACCT 6014 Test 1 Review

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    ACCT 6014 Test 1 Review

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    10 views23 pages

    ACCT 6014 Test 1 Review

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    ACCT-6014

    Test #1 – Review
    June 1, 2023 @ 12:00pm
    Reminders

    EXAM PROCEDURES:
    • In-person exam: students are required to bring a laptop
    • Exam is on FOL using Respondus Lockdown Browser
    • Test is password protected and the password will be released in class
    • CLOSED BOOK test: You will not be permitted to use any reference material
    for the test.
    • A non-programmable calculator is permitted.

    • FOL Announcement when results are FINAL (draft mark may appear
    prior to finalization)
    Reminders

    • Test #1 Details:
    • Chapters 1 - 6
    • 150 minutes (2.5 hrs)
    • 30% of overall grade
    Review Deck

    Test coverage: The test covers Chapters 1 through 6


    • This slide deck provides a summary of some of the topics that
    have been covered in each of the modules; however, you are
    responsible for all content
    Reminders

    • Tips on Written Responses:


    • Not too much
    • Shows lack of understanding
    • Not too little
    • Don’t make assumptions
    • Just Right
    • Use case facts
    • Include the SO WHAT
    Reminders

    Tips on Written Responses (Example):


    As the auditor, what materiality value would you assign your client.
    • Not too much
    • There are four bases which could be used, they are… NI / Rev. / Assets / Equity
    and the percentages for each are…follow the guidelines of Cdn Professional
    Engagement Manual…
    • Not too little
    • We used 5% of net income, therefore materiality is $100,000
    • Need to include why did you choose Net Income, what are the figures used, did
    you include tax
    Chapter 1 – Different Levels of Assurance

    • 1.4 Different Level of Assurance


    What are the three types of engagements that a practitioner can
    provide? How much assurance does each provide?
    Table 1.2 Type of Engagement Level of Assurance
    Audit Reasonable assurance means a high,
    but not absolute, level of assurance.
    Review Allow the practitioner to conclude
    and express limited assurance in that
    nothing has come to their attention.
    Compilation Compile a set of financial statements
    based on information provided. No
    assurance is provided.
    Chapter 1 – Audit Opinions

    • 1. 5 Different Audit Opinions

    • Common: Unmodified Opinion (“Clean Opinion”)


    • May include an “Emphasis of Matter” paragraph
    Chapter 2 – Activity
    2.1.2 Specific Rules
    2.2.1 Threats to re: Professional 2.1.1 Fundamental
    Independence Ethics Ethical Principles
    Self-Interest Threat Fees and Pricing Professional Behaviour
    Self-Review Threat Advertising Integrity
    Advocacy Threat Contact with Predecessor Professional Competence
    Familiarity Threat Firms Names Confidentiality
    Intimidation Threat Professional Conduct Objectivity
    Chapter 3 – Related Parties

    • 3.3 Related Parties


    It is the responsibility of the auditor to ensure that related parties
    are identified and appropriately disclosed in accordance with
    relevant accounting standards.
    Chapter 3 – Related Parties

    • 3.4 Evaluate Fraud Risk


    As a part of the risk assessment phase of the audit, an auditor will
    assess the risk of a material misstatement due to fraud.
    What are the two types of Fraud?
    • Financial reporting fraud
    • Intentionally misstating items or omitting important facts from the financial
    statements.
    • Misappropriation of assets
    • generally involves some form of theft.
    Chapter 3 – Related Parties

    • 3.4 Evaluate Fraud Risk


    What are the three factors of the Fraud Triangle?

    • The incentives and pressures to commit a fraud: Management and


    employees must first have a reason to commit fraud, and thus an
    incentive or pressure exists.
    • The opportunities to perpetrate a fraud: There must be a lack of
    adequate supervision or internal controls so that an opportunity to
    commit fraud exists.
    • The attitudes and rationalizations used to justify committing a fraud:
    This means that management and employees are able to justify their
    actions.
    Chapter 4 – AUDIT RISK

    • 4.1 Audit Risk


    The risk that an auditor expresses an inappropriate audit opinion
    when the financial statements are materially misstated
    Question: How do you reduce audit risk to zero?
    • It is impossible to eliminate audit risk altogether, an auditor will
    aim to reduce it to an acceptably low level
    Question: What are the three elements in Audit Risk?
    • Audit Risk = Inherent Risk X Control Risk X Detection Risk
    • AR = IR X CR X DR
    Chapter 4 – AUDIT RISK

    • 4.1 Audit Risk


    IR: Inherent risk is the risk of a material misstatement before
    consideration of any related controls. This is the risk that errors can
    simply happen
    CR: Control risk, is the risk the client’s controls will not prevent, or
    detect and correct, a misstatement on a timely basis
    DR: Detection risk means the risk that the procedures performed by
    the auditor will not be effective in in detecting a material
    misstatement should there
    Inherent Riskbe oneControl Risk Detection Risk
    High High Low

    If IR and CR are high; DR set as low  increase detailed substantive procedures


    Chapter 4 – Materiality

    • 4.2 Materiality
    Used to guide audit testing and to assess the validity of information
    contained in the financial statements and their notes. Information is
    considered material if it impacts the decision-making process of the
    users of the financial statements.
    Qualitative Factors: information is material  affects user's
    decision-making process
    • E.g. Compliance matters (regulatory or debt covenants), Management
    Compensation, Significant Omissions
    Quantitative Factors: Exceeds preliminary materiality assessment
    Chapter 4 – Materiality

    Common bases and percentages used for materiality


    • 5–10% of normalized pre-tax profit
    • 0.5–2% of total assets
    • 0.5–5% of equity
    • 0.5–2% of revenues or expenditures
    Chapter 4 – Materiality

    Factors that may affect the identification of an appropriate base include the
    following:
    • the elements of the financial statements (for example, assets, liabilities,
    equity, revenue, expenses)
    • where financial statement users may intend to focus their attention,
    • E.g. in evaluating financial performance, users may tend to focus on profit, revenue, or
    net assets
    • the nature of the entity, where the entity is in its life cycle, and the industry
    and economic environment in which the entity operates
    • the entity's ownership structure and the way it is financed;
    • E.g. entity financed solely by debt than equity, users may put more emphasis on assets,
    and claims on them, than on the entity's earnings
    • the relative volatility of the benchmark
    Chapter 4 – Audit Strategy

    • 4.3 Audit Strategy


    Sets the scope, timing, and direction of the audit and provides the
    basis for developing a detailed audit plan. The audit strategy chosen
    depends on the auditor's preliminary inherent and control risk
    assessment.
    • Auditor adopts a predominantly substantive approach when
    required DR is low
    • Auditor adopts a combined audit strategy when assessed CR is low
    and required DR is high
    Chapter 5 – REVIEW Questions

    • 5.2 Explain the difference between the completeness and existence


    assertions.
    • 5.5 What external parties could an auditor send a confirmation to?
    • 5.6 What is the purpose of a management representation letter?
    Chapter 6 – Sampling

    • 6.2: Sampling Risk


    Risk that sample chosen by auditor is not representative of the population
    available for testing
    Therefore, auditor arrives at an inappropriate conclusion.

    • Controls Testing:
    • Auditor concludes I/C are effective when they are ineffective
    • Auditor concludes I/C are ineffective when they are, in fact, effective
    • Substantive Testing:
    • Auditor concludes material misstatement does not exist when it does
    • Auditor concludes material misstatement exists when it does not
    Chapter 6 – Sampling

    6.4: Sampling Techniques


    • Random Selection
    • Systematic Selection
    • Haphazard Selection
    • Block Selection
    • Judgmental Selection
    Chapter 6 – Sampling

    6.7: Evaluating Sample Test Results


    • Projected Error

    • Population: $500,000
    • Sample Size: $100,000
    • Error Noted: $ 2,000
    • Projected Error: ?
    Fin!

    Good Luck

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